How a Huawei 5G ban is about more than espionage

The expected ban of controversial Chinese equipment maker Huawei from 5G mobile networks in Australia on fears of espionage reads like a plot point from a John le Carre novel.

But the decision will have an impact on Australia's $40 billion a year telecoms market - potentially hurting Telstra's rivals.

Huawei: Still banned from the NBN, and could be banned from 5G.

Photo: Bloomberg

It looks like Huawei, already banned from any involvement in the NBN, has next to no chance of being involved in the next generation of mobile services in Australia.

The company, which has been accused of spying by lawmakers in the US, and criticised for its links to the Chinese military and government was "all but certain" to be blocked from supplying equipment for 5G wireless networks, The Australian Financial Review reported this week.

The Sydney Morning Herald and The Agereported in March that there were serious concerns within the Turnbull government about Huawei's potential role in 5G - a new wireless standard that could be up to 10 times as powerful as existing mobile services, and used to power internet connections for a range of consumer devices beyond phones.

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While 5G mobile networks will be privately built, owned and operated by telcos, the government will still be able to block vendors from supplying equipment for them on national security grounds.

Reforms that come into effect in September require telcos to protect their networks from "unauthorised access and interference", and to inform the government of any proposed changes that could compromise that.

The call on whether Huawei will be allowed to supply equipment to telcos for 5G will rest with the federal government's Critical Infrastructure Centre, which sits within the Home Affairs portfolio.

That contrasts with the NBN decision, which was ultimately made by Cabinet.

Government sources contacted for this story confirmed they expect intelligence agencies to take a strong line against Huawei, and issue a recommendation that it be banned. However, no decision has been made, they said.

Which brings us back to the private companies actually building and paying for these networks. Telstra has refused to exclude Huawei from its 5G tender, but that is seen more as a way of keeping its existing supplier Ericsson on its toes.

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Huawei, however, is a major supplier for Vodafone's existing 4G network. To a lesser extent, Optus also uses its equipment.

It's also a supplier for TPG Telecom, which is ruthlessly competitive on pricing, and spending $600 million to build a 4G network of its own.

TPG's move into mobiles has led to concerns about a period of irrational competition in the telco industry. It is one of the reasons share prices of Telstra (and for that matter TPG) are both deeply in the toilet.

But if Huawei is banned, TPG's plans to build a network so cheaply might be complicated.

As one industry observer succinctly put it: "If the cheapest supplier is no longer available, then your costs go up."

Under the 4G standard, Huawei only supplied equipment for the RAN (Radio Access Network) component of networks in Australia. This meant the more sensitive "core" (or "brain") of the network could be ringfenced. But under 5G, it will be much more difficult to do this, sources say.

And since the first version of 5G networks are expected to be bolt-on upgrades to existing 4G networks, banning Huawei could complicate the upgrade path for the carriers that rely on its products.

In other words, a ban could be bad news for TPG, Vodafone and Optus. Whether it is necessarily good news for Telstra - which has its own issues at the moment - is less clear.

"The $600 million of capex [TPG is spending] is enough to build a network that has no customers on it," says Citi analyst David Kaynes. "Once you add load to the network and build market share they will need to add to that. "

Former Liberal minister Alexander Downer was on the Huawei board.

Photo: AFR

In a worst-case scenario, if Huawei was banned, TPG could sink hundreds of millions of dollars into a network that is difficult to upgrade - effectively a stranded asset.

Huawei has lobbied aggressively in Australia, hiring former politicians from both sides of the aisle (former Liberal foreign minister Alexander Downer previously served on its Australian board; former Labor Victorian premier John Brumby still does).

But to little avail.

Intelligence agencies tend to get their way on matters like these. China is a particularly sensitive diplomatic issue in Canberra the moment but standing up to support one of China's corporate champions at this time would surely be political suicide.

John McDuling writes about business, technology and the economy. Previously he was a reporter for Quartz in New York, covered telecommunications and markets for the Financial Review, and worked in the finance industry.